NZ GDP (QoQ) (Q3) (21:45 GMT; 16:45 EST)
Expected: 0.4%
Previous: 0.7%

NZ GDP (YoY) (Q3) (21:45 GMT; 16:45 EST)
Expected: 3.2%
Previous: 3.2%

What Are the Markets Facing?

According to a survey of economists polled by Bloomberg News, expansion in New Zealand during the third quarter is expected to have cooled slightly to 0.4 percent after growing 0.7 percent during the second quarter. While trade figures were more encouraging going into the fourth quarter, the New Zealand dollar’s appreciation throughout the first half of the year had a lasting impact on exports in the third quarter on softer sales of dairy products. Indeed, manufacturers suffered the most as sales dropped 4.2 percent, excluding inflation. On the other hand, retail sales fared slightly better when compared to the second quarter as labor markets tightened further and the unemployment rate dipped to an all-time low of 3.5 percent. Meanwhile, residential construction is forecasted to have contributed to economic growth during the third quarter, though that will probably not be the case going into the fourth quarter and into 2008, as the Reserve Bank of New Zealand’s aggressive monetary policy tightening cycle and a global credit crunch takes a toll. Nevertheless, the central bank is a bit more optimistic about projections for GDP, as RBNZ Governor Alan Bollard predicted 0.6 percent growth during the third quarter, and also said that interest rates are “likely to remain around current levels for longer than previously thought” given upside inflation risks from rising commodity prices. As a result, there is some potential for this GDP reading to be surprisingly strong, and the news could spark some wild price action market-wide amidst low volumes ahead of the holidays.

Bonds – 10-Year New Zealand Government Bonds

Yields on 10-year New Zealand government bonds have run into trendline resistance near 6.55 percent, and if GDP figures cool in line with expectations, they could easily pull down towards 6.35 percent. On the other hand, if GDP is actually as optimistic as RBNZ Governor Bollard expected, yields could climb higher as the markets judge that interest rates will remain on hold at a record high of 8.25 percent.

FX – NZD/USD

The New Zealand dollar has reverted to range trading against the greenback, as the pair has slowly trended higher above the confluence of the 100 SMA and 200 SMA. Recently, weak economic data including a wider-than-expected current account deficit and deteriorating business confidence, along with slightly softer commodity prices has allowed NZD/USD to fall towards support. However, the pair has had difficulty pressing below 0.7550, and the release of New Zealand GDP figures could determine whether the pair drops or regains its footing. Economist estimates are for a slowdown in Q3 to 0.4 percent, which could weigh the Kiwi dollar down towards support at 0.7459/70, with sharper declines targeting 0.7288/30. On the other hand, if GDP is a bit more optimistic, as RBNZ Governor Bollard is expecting, NZD/USD could rebound to take aim on 0.7670.

Equities – NZX 50 Index

Equities in New Zealand have tumbled significantly over the past few weeks, though the 3,895 – 3,900 level has helped to provide support. The release of Q3 GDP figures may have only a small impact on the NZX 50 Index, as broader stock market themes such as the global credit crunch have remained one of the primary concerns of traders. Nevertheless, if GDP is surprisingly strong, New Zealand equities could see a bounce towards 4,000 as the news would suggest that businesses continue to thrive. On the other hand, if GDP cools in line with expectations, the NZX 50 could take a hit and ease back towards 3,895 once again.

Terri Belkas is a Currency Strategist at FXCM.